Happy camper cost allocation

Cost allocation is a subject of terror and annoyance for most founders.

And for good reason:

It’s hard to execute

It’s even harder to explain

It often forces you to hold multiple truths in your head

And it’s subjective enough that you’ll wish you’d picked a different method… usually in hindsight

But it’s also one of the most powerful tools in your financial toolkit.

Because until you allocate shared costs across your projects,

You’re just guessing at their profitability.

Okay, first some essential context:

ELI5 Cost allocation and why you should care:

When you have a business with multiple businesses or employees, you might wonder,

"How much is this project/person costing me or making me in profit?"

And if you want to find that out, you can't just look up their salary or cost of the billable hours and materials;

You need to also account for them paying their fair share of overall company costs costs - aka rent, insurance, software, marketing etc.

So you take all those overall company costs and you allocate them to the various projects or employees to see their FULL cost.

Sounds simple, but when you start to do it, you realize it's really not.

Because HOW should they share the costs of the company?

And how do we deal with things like R&D or the Finance Department in all this - do we allocate cost to them, or do we allocate their cost somewhere else?

Today, I stumbled on a new way to explain how to think about all of that more clearly.

Enter: The Happy Camper Cost Allocation Framework.

Imagine... your company is a family on a backpacking trip.

Everyone’s going. Everyone benefits. But not everyone’s carrying the same weight, or creating the same need for supplies.

The adults on the trip?

They’re your profitable projects, products, services, or employees.

They carry the load, because they can.

And when you’re looking at profitability, that’s where the shared company costs (rent, admin, ops) need to land.

But then there’s Little Timmy...

He’s not carrying a pack

But because he came along, you brought extra food, another sleeping bag, a bigger tent.

Timmy is your R&D initiative.

Or that new product still in early development.

Or your HR department.

Or maybe a deliberate loss leader.

He’s not profitable.

But he’s still adding to the cost of the trip - and you need to understand how.

So depending on why you're allocating costs, you might take two different approaches:

If you’re trying to understand which products are carrying the company (aka. who’s keeping the lights on) you allocate costs to the adults.

But if you’re trying to understand what something truly costs to deliver, you might allocate based on who caused the cost to exist, even if they didn’t carry it.

But the options for allocation don’t end there.

When deciding what weight “belongs” to each member of the party, you could:

Get super precise and manually allocate each gram of food based on how much everyone eats

Use a proxy, like body weight

Or just divide it evenly and call it a day

Just like in business, you might:

Manually allocate costs to specific projects

Use a reasonable proxy like team size, time spent, or revenue earned

Or go with a quick-and-dirty equal split

None of it is the right way.

You’re just picking a method that balances:

The most accurate picture, based on what you’re trying to decide

With the easiest method to calculate and maintain, so it’s usable when you actually need it

Get it right,

And you’ll be one happy camper.

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